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Fed Stimulus Still Needed to Help Recovery, Bernanke Says Fed Endorses Stimulus, but the Message Is Garbled
(about 5 hours later)
WASHINGTON — Despite recent improvement in the job market, the Federal Reserve needs to continue its stimulus efforts to avoid endangering the recovery, the Fed chairman, Ben S. Bernanke, told Congress on Wednesday. WASHINGTON — Despite signs of improvement in the job market, the chairman of the Federal Reserve, Ben S. Bernanke, and most other Fed officials signaled Wednesday that they remained cautious about easing back too quickly on their efforts to stimulate the economy.
While acknowledging the risks of historically low interest rates and the Fed’s aggressive policy of buying government bonds to help stimulate the economy, Mr. Bernanke said in testimony that “a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.” While some Fed policy makers suggested that the central bank could begin reducing its monthly purchases of government bonds as early as next month, most still want to see continued evidence of an upswing in the job market and a decline in unemployment first, according to minutes of the most recent meeting of the Fed’s policy arm that were released Wednesday afternoon.
After his opening statement, however, Mr. Bernanke seemingly opened the door a bit wider to tapering down. Confusion on Wall Street over the Fed’s intentions led to a topsy-turvy day in the stock market. The major indicators were up in the morning after Mr. Bernanke testified to a Congressional committee but then fell sharply after the meeting minutes were disclosed.
Under questioning by Representative Kevin Brady, a Texas Republican who chairs the Joint Economic Committee, Mr. Bernanke said the Fed could prepare to “take a step down” in the next few meetings if the outlook for the labor market improved. In his testimony, Mr. Bernanke said that ending the $85 billion monthly bond-buying effort too soon would do more harm than good.
“It’s dependent on the data,” he said. “If the outlook for the labor market improves, we would respond to that.” “A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery,” he said.
Mr. Brady asked if the tapering could begin before Labor Day, prompting Mr. Bernanke to say, “I don’t know.” While Mr. Bernanke clearly enjoys the support of a majority of the Fed’s Open Market Committee, the minutes suggested that he was finding it challenging to forge a consensus.
“We are buying a certain amount of assets each month,” he continued. “We are looking for increased confidence and in steps respond to that.” Under questioning from a lawmaker, Mr. Bernanke suggested that the Fed might cut back on bond purchases some time in “the next few meetings.” That statement took on greater significance on Wall Street after the minutes hinted at the more unnerving prospect of action as early as June.
According to a summary of the Fed’s last Open Market Committee meeting released Wednesday afternoon, Fed policy makers were still tentative about dialing back on their efforts to boost growth at their session on April 30 and May 1. Still, many analysts said the odds were against a change of direction at the Fed’s meeting next month.
“A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth,” the minutes of the meeting stated. However, views differed on just what that evidence would be and whether a tapering was indeed likely. “It’s been on the minds of committee members, but I don’t think the minutes mean they’re going to collectively take their foot off the gas in June,” said Erik Johnson, an economist with IHS Global Insight.
While “a few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September,” others members of the panel were less convinced, according to the minutes. More likely, he said, would be a pullback beginning in late summer or early fall if the economy sustains its momentum. Even if that happens, the Fed will remain extraordinarily accommodative by many other measures, with short-term interest rates staying very low.
“In contrast, a few other members focused on evidence that market expectations about the total size of the program had changed little,” the record showed. In response to a question from Representative Kevin Brady, a Texas Republican who is chairman of the Joint Economic Committee, Mr. Bernanke said that whenever the stimulus began to taper off, it would not happen in an “automatic, mechanistic program. Any change would depend on the incoming data.”
While there was no clear consensus on policy, most members agreed on the need “to communicate clearly that the pace and ultimate size of its asset purchases,” would depend on outlook for the economy, a stance echoed by Mr. Bernanke in his testimony earlier the day. Further evidence for a move in a few months, rather than weeks, came in an interview shown on Wednesday on Bloomberg TV with the president of the Federal Reserve Bank of New York, William C. Dudley, that seemed aimed at clearing up some of the confusion.
In his opening statement, Mr. Bernanke said that since last summer, “financial conditions in the euro area have improved somewhat,” helping lessen the headwinds faced by the American economy as well. “I think three or four months from now you’ll have a much better sense of is the economy healthy enough to overcome the fiscal drag or not,” said Mr. Dudley, who is a close ally of Mr. Bernanke.
He noted that the federal government’s fiscal policy had become “significantly more restrictive,” even as the Fed had pursued a looser monetary policy. The expiration of the payroll tax reduction in January and tax increases, as well as automatic spending cuts imposed by Congress and lower military spending, will collectively “exert a substantial drag on the economy this year.” Outside the canyons of Wall Street and the world of Fed watchers, the difference between June and August or September might not appear significant. But with interest rates at historical lows, any move to cut back on bond purchases by the Fed would undoubtedly cause an uptick in bond yields. That would affect the huge market for government and corporate bonds and force stock market investors to recalibrate their positions.
Speculation had been rising in recent weeks that the Fed might be preparing to taper its bond purchases, which total $85 billion a month. The bond-buying program has been credited with increasing growth, but some observers worry it could create a bubble in the prices of assets like stocks. When the trading day began on Wednesday, investors were in a buoyant mood, sending stock indexes higher as Mr. Bernanke began his testimony. Markets around the world have rallied this year on hopes that the Fed and other central banks will continue to support financial markets with monetary policies.
At its most recent meeting this month, the Fed said it was “prepared to increase or reduce the pace of its asset purchases,” prompting some analysts to speculate that bond purchases might be reduced in the coming months. As the day went on, though, traders began to reconsider some of Mr. Bernanke’s comments. After the details of the Federal Open Market Committee meeting on April 30 and May 1 were released, many strategists said they were surprised by the number of voices inside the Fed calling for a slowdown in the stimulus effort in the near future.
“In considering whether a recalibration of the pace of its purchases is warranted,” Mr. Bernanke told the Joint Economic Committee, the Fed “will continue to assess the degree of progress made toward its objectives in light of incoming information.” The minutes said, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”
Stocks on Wall Street surged after Mr. Bernanke’s remarks but pulled back in afternoon trading. In response, the Standard & Poor’s 500-stock index finished the day at 1,655.35, down 13.81, while the Dow Jones industrial average fell 80.41 to 15,307.17. The tech-heavy Nasdaq index, which has been on a tear lately, sank 38.82 to 3,463.30, or slightly over 1 percent.

This article has been revised to reflect the following correction:

Mr. Bernanke indicated that he was not particularly worried that the stock market was moving into bubble territory, despite the 16 percent surge in the S.& P. 500 since the beginning of the year.
“Our sense is that major asset prices like stock and bond prices are not inconsistent with fundamentals,” he said. Commonly used yardsticks for measuring the value of stocks, like price-to-earnings multiples, Mr. Bernanke concluded, are “fairly normal.”

Nathaniel Popper contributed reporting from New York.

This article has been revised to reflect the following correction:
Correction: May 22, 2013Correction: May 22, 2013

An earlier version of this article incorrectly described the timing given by Mr. Bernanke of a potential Fed move. He said the Fed could prepare to “take a step down” in the next few meetings, not the next few weeks.

An earlier version of this article incorrectly described the timing given by Mr. Bernanke of a potential Fed move. He said the Fed could prepare to “take a step down” in the next few meetings, not the next few weeks.

This article has been revised to reflect the following correction:This article has been revised to reflect the following correction:
Correction: May 22, 2013Correction: May 22, 2013